The Austerity Death-Trap

Ron Paul’s newly-unveiled economic plan – promising to cut $1 trillion from the federal budget in year one (presumably that means 2013) – is only slightly more ambitious than what we’re hearing from other Republican candidates. They’re all calling for major spending cuts starting as soon as possible.

What are they smoking?

Can we just put ideology aside for a moment and be clear about the facts? Consumer spending (70 percent of the economy) is flat or dropping because consumers are losing their jobs and wages, and don’t have the dough. And businesses aren’t hiring because they don’t have enough customers.

The only way out of this vicious cycle is for the government – the spender of last resort – to boost the economy. The regressives are all calling for the opposite.

But even without these hare-brained Republican plans, we’re heading in their direction anyway. Unless Republicans agree to a budget deal before the end of the year (don’t hold your breath), the temporary payroll tax cuts and extended unemployment benefits we have now will end.

The result will be the most stringent fiscal tightening of any large economy in the world.

Together with ongoing cuts at the state and local government level, the scale of this fiscal contraction would be almost unprecedented.

It will come at a time when 25 million are Americans looking for full-time work, median incomes are dropping, home foreclosures rising, and a record 37 percent of American families with young children are in poverty.

To call this economic lunacy is to understate the point.

And if you think 2011 is bad, you ain’t seen nothin’ yet.

Even if you’re a deficit hawk this is nuts. Instead of reducing the ratio of debt to the size of the overall economy, this strategy increases the ratio because it causes the economy to shrink.

Call it the austerity death trap.

Under these circumstances, the harder a country works to cut its debt, the worse the ratio becomes — because the economy shrinks even faster.

Greece is already in the trap. Spain and Italy are perilously close. Even Britain, France, and Germany are tip-toeing up to it. And now us.

Deficit hawks have to understand: The first step must be to revive growth and jobs. That way, revenues increase and the debt/GDP ratio drops. Only then – when the economy is back on track – do you start cutting.

At the start of the Clinton administration the annual budget deficit was almost $300 billion. But rather than take a meat-axe to spending, we pushed for growth, as did the Fed. The expansion of the 1990s made it easy to get the budget under control. By 2000 we had a $226 billion surplus.

The austerity trap will even hurt Mitch-McConnell Republicans whose top priority is to “make sure Obama is a one-term president.”

While it increases the likelihood of this Republican goal, it doesn’t stop there. Because the austerity trap will last for many years, any Republican successor will also be a one-termer.

DISCLAIMER: The opinions expressed here are those of the individual contributor(s) and do not necessarily reflect the views of the LA Progressive, its publisher, editor or any of its other contributors.

About Robert Reich

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine.

Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

Comments

As usual, Reich is correct – except perhaps in his usual rationalist economist assumption that other folks are trying to rationally maximize their material profits.

The Congressional Republicans – like the militant Islamic supremacists whom rationalist-economist types equally misunderstand – don’t care all that much about maximizing their own profits. They are not in it for the money. Rather, they are in it for the Schadenfreude: they want to see everyone else lose as much as possible relative to their own sponsors. They prefer to be kings of a dungheap nation rather than seconds in a palace.

Mitch McConnell et al don’t care whether a GOP president too will be a one-termer. In fact, they apparently don’t care whether 2012 voters will see the GOP presidential candidate as a credible alternative to Obama. They’re actually OK with Obama, because he plays along with them as much as they can hope from any so-called Democrat and in addition allow them to blame a nominally Democratic president for the actual fix their policies put the country in.

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The Middle East

Richard Greeman: Anti-government demonstrations spread across Morocco after social media spread the story of Mousine Fikri, a fishmonger crushed to death inside a garbage truck as he tried to block the destruction of a truckload of his fish confiscated by police.